diff --git a/spec/lax/lax_spec.lua b/spec/lax/lax_spec.lua
index 92a9d6061..f3047374b 100644
--- a/spec/lax/lax_spec.lua
+++ b/spec/lax/lax_spec.lua
@@ -20,4 +20,27 @@ describe("lax mode", function()
       { msg = "three" },
       { msg = "data" },
    }))
+
+   it("defines lax arity of returns in function literals (#736)", util.lax_check([[
+      -- f: function(unknown...):unknown...
+      local f = function()
+          return function() end
+      end
+
+      for a, b in f() do
+      end
+
+      -- g: function(unknown...):unknown...
+      local function g()
+          return function() end
+      end
+
+      for x, y in g() do
+      end
+   ]], {
+      { msg = "a" },
+      { msg = "b" },
+      { msg = "x" },
+      { msg = "y" },
+   }))
 end)
diff --git a/tl.lua b/tl.lua
index 5541e8ee2..b18dfb7d1 100644
--- a/tl.lua
+++ b/tl.lua
@@ -11373,7 +11373,7 @@ self:expand_type(node, values, elements) })
                min_arity = node.min_arity,
                typeargs = node.typeargs,
                args = args,
-               rets = rets,
+               rets = self.get_rets(rets),
             }))
          end,
       },
diff --git a/tl.tl b/tl.tl
index a021db2f3..35f6ce292 100644
--- a/tl.tl
+++ b/tl.tl
@@ -11373,7 +11373,7 @@ do
                min_arity = node.min_arity,
                typeargs = node.typeargs,
                args = args,
-               rets = rets,
+               rets = self.get_rets(rets),
             }))
          end,
       },